The Crater Lake Speech

Good afternoon, fellow investors. I have a special request today. Please take it seriously!

I’m asking the sponsors of this conference and all of you in the audience to turn off your tape recorders, so I can speak freely and openly about some very sensitive issues. I want to expose some very bad advice being given these days, and more importantly, to warn you to stay away from some bad investment deals currently being promoted. I also want to warn you about some very disturbing activities that are going on in Washington. And I don’t want to have to temper my remarks, so please, no tape recordings!

A few days ago, as I was preparing for this conference, I was several thousand feet above sea level overlooking one of the most spectacular wonders of the world, Crater Lake. There, in beautiful southern Oregon, the air is crisp, the water is pure and the population is sparse. One gets a better perspective on life. Crater Lake inspired me to come down from the mountain and deliver this speech – a financial volcano, if you will. What is the Greatest Threat to Your Money?

The topic I was assigned at this conference was, “The Greatest Threat to Your Private Wealth Today.” Normally, I talk about the government as the greatest threat.

Indeed, it is a serious threat, but I’m afraid that there is a greater threat today. The biggest threat to your wealth isn’t the federal government, it’s this conference!

The government can take up to half your income, but as a result of attending this seminar, you could end up losing all of your money – 100% – and sometimes more, if you borrowed funds to invest. How can this happen? By following the advice of some hot-shot high-pressure salesman who is disguised as a respectable speaker up here on the podium! You get talked into some crazy unorthodox investment scheme that promises big profits but only delivers margin calls and tax losses. And don’t think it can’t happen to you, folks! I’m speaking of a very unfortunate new trend in the investment seminar business. It used to be that the podium was reserved for independent investment writers, security analysts or investment bankers – experts who didn’t have a vested interest in what they were saying. The exhibit hall was reserved for salesmen or brokers who sold the investment products that may or may not be recommended at the podium. But today a lot of charlatans are up here on the dais pretending to give you independent information and unbiased advice, when they are actually pushing their own pet investment programs.

LADIES AND GENTLEMEN, YOU’RE PAYING $495 TO HEAR A SALES PITCH.

Before delivering this speech today, I went through the conference brochure and the biographies of the so-called “speakers.” I was shocked to find that 60 out of the 80 on the program were nothing more than merchandisers, wolves in sheep’s clothing, who don’t have any broad background at all in the general field of investing. Some, I happen to know, have highly questionable backgrounds and have been involved in fraudulent deals in the past.

Now there’s probably an economic reason for this sudden shift. The “high interest, low inflation” economy has not been good for the seminar business, and some seminar promoters (fortunately not all – I certainly don’t include Jim Blanchard, Howard Buff or Bob Kephart in this category) are making it up by having shady salesmen come to the stand, because they are willing to speak for free. In fact, I’m sure most of you are unaware that many of these exhibitors actually paid the sponsor of this seminar for the opportunity to speak! They must have high hopes for your money.

When I learned this, I began to wonder if those of us who are independent investment writers aren’t giving tacit approval and endorsement to a bunch of questionable characters in the business by sharing the same platform.

I suggested to the sponsor that in the future, speakers be identified by three categories:
(1) those traditional speakers who are paid a fee;
(2) those who pay their own way; and
(3) those who pay to speak. Then attendees can know what each speaker really represents.

Now don’t get me wrong. I’m not speaking out against using brokers and salesmen in general as speakers. I’ve held conferences myself where I’ve had them as speakers because they were the only ones who had expertise on a particular subject. No, I’m not talking about honest businessmen who have a good product to sell – I have the highest regard for many of them, and they are doing a service for the investor. I’m talking about hucksters, masquerading as legitimate speakers, who will sell you a bill of goods. And, unfortunately, for monetary reward, some conference sponsors are giving them legitimacy by making them bona fide speakers.

BEWARE THE FINANCIAL PLANNER’S VESTED INTERESTS

Another trend that deeply concerns me is that so-called “financial planners” are starting to take commissions or enter into joint businesses with dealers to sell investments. It’s probably inevitable, but it’s not without pitfalls. When an independent counselor knows he gets a commission for recommending an investment, it can distort or cloud his vision, often without his even knowing it. It causes him to lose his objectivity, to subconsciously push a more expensive product sometimes, or even the wrong investment, because of the monetary reward. Many financial planners disclose their business connections, and that’s honorable. But even disclosed business interests can lead to biased advice.

LONGT-TERM INVESTMENTS ARE HIGH RISK IN THIS HIGH INTEREST RATE CLIMATE!

But why invest at all in the investment programs that these promoters will be touting over the next few days? Most salesmen and brokers want you to make a long-term commitment. But, in this Age of the Dollar Boom, where interest rates are high and inflation is low, it’s a mistake to make a long-term investment in anything – stocks, bonds or gold. Beware of anyone who says, “This is a great long-term investment, but be prepared to hold on for several years before profits are realized.” If you read between the lines, it usually means that the promoter is getting big commissions, or that there’s no secondary market if you needed to sell quickly. (And no secondary market means you’re forced to hold long-term whether you like it or not!)

There is no sound long-term investment in today’s volatile, uncertain economic climate.

Not stocks! Not bonds! Not gold! Not silver! Not Swiss francs! Not real estate!

There are no permanent investments anymore, except maybe a money market fund. Stocks, bonds and hard assets are short-term, trading vehicles. Don’t make the mistake of blindly investing long-term with an individual stock, bond, mutual fund or gold coin, expecting inflation or recovery to make your profits for you. They all need to be monitored constantly, and sold if the investment climate changes.

I think the worst advice given by investment counselors today is to invest for the “long term,” to buy X investment and “forget about it.” More money has been lost in “forgotten” coins, penny stocks and Swiss bank accounts by following this unsound principle than in anything else. It does matter when you buy, it always pays to watch the value of your investments, and it’s important to sell when necessary.

The only exception is a highly liquid, short-term money market instrument, like a money market fund or Treasury bills. You have instant access to your funds, and can move them in or out of a short-term speculation without any problems or delays. In this “high interest, low inflation” environment, there’s nothing wrong with having a majority of your funds in a money market-fund, or even an insured bank certificate of deposit six months or less if you can’t control your spending. It may not be the most exciting investment in the world, but it will preserve your capital, and keep you from losing your shirt in other speculations. In fact, I recommend this approach for most traditional savers and conservative investors.

Speculators want something more exciting. I understand that. Personally, I’m into the stock market and out of gold, but that could change at any time. I watch my investments closely. Frankly, many speculators could do a lot better forgetting about all those enchanting opportunities and just adding to their money fund every day. The conservative tortoise almost always beats the speculative hare.

My experience has been that the most profitable approach for the vast majority of people is to invest their money in their own business and keep any surplus capital in the bank or a money fund, and perhaps some real estate. Gold should be held primarily as insurance against bad times, not as a profitable investment. I doubt that very many of you will take this advice. You didn’t spend hundreds of dollars to come to this seminar and be told to invest in a money market fund! Yet it’s the safest course, and many of you are going to do a lot worse than a money fund by getting into some risky investment because of this seminar.

You want my advice to make money at this seminar? Don’t do anything for at least two weeks! That will keep you from getting involved in a bad investment deal in the heat of the moment. The exhibitors aren’t going to like this advice: but it will help you separate the wheat from the chaff. Many attendees near the end of a big conference come up to me and complain, “I’m so confused, I don’t know what to do.” I say, “Good!” When you’re confused, you’re immobilized. You won’t be tempted to waste your hard-earned funds on a bad investment. I’m not saying you shouldn’t visit the exhibit hall. Go ahead, and pick up all the literature (although I wouldn’t give them my real name and telephone number). And buy some good books on various investment topics. I’m a firm believer in education – better to learn from knowledge than experience!

WATCH OUT FOR UNORTHODOX “INVESTMENTS”

Before I move on to another important topic, I want to warn you about one more thing. Be skeptical of unproven, non-traditional investments. Most of them are artificial, phony markets. I can think of several recent examples: diamonds, gemstones, jojoba beans, newly minted coins and medallions, certain collectibles and many private placement tax shelters. Even penny stocks often fit in this category. Common characteristics include:

1. highly illiquid, i.e., little or no secondary market

2. high or excessive commissions for the seller

3. artificial “limited” editions or new issues

4. must be held for the “long-term,” usually 4-5 years, before “profits” can be realized.

I look back at the so-called “investment grade” diamond market in the late 1970s as a classic example. Huge profits were promised by promoters and hard-money investment advisers because diamond prices were controlled by DeBeers and had never had a “down tick.” Dozens of new diamond dealers exhibited at seminars. Today, of course, the story is quite different. At the same seminars I now attend, I don’t see a single diamond dealer. Many of them are out of business. I read an article the other day stating that a top-grade one carat diamond that sold for $69,000 in 1980 is selling for $12,000 today! Unfortunately, most people bought in 1980, and where are those stones today? Still buried in a plastic case in a safe deposit box! The original buyers are still holding on, waiting in vain for their diamonds to recover. Even if they wanted to sell, it’s often very difficult to find a buyer for an “investment grade” diamond.

Today the “hot” investment is penny stocks, and it’s the same old story. “Buy a dozen penny stocks, sock them away and forget about them – you’ll be rich someday!” Meanwhile, the penny stocks have fallen out of bed. They may have cost you a dollar a share to buy them, but today they truly are “penny” stocks!

Let me ask you a question: How many of you have tripled your money in a penny stock? How many of you have actually bought and sold a penny stock and made 200% or more? (Note: not a single hand went up.) I rest my case.

Well, I have a confession to make. I did triple my money on a penny stock! I’m not trying to be egotistical (I’ve had my share of bad investments too), but I’m trying to make a point. The reason I tripled my money in a penny stock was because:

· First, I bought at the right time, during a period of time when penny stocks were moving up in value.

· Second, I monitored the stock closely.

· Third, I had a goal in mind. When the penny stock’s price rose 200%, I figured I had made enough money, so I sold out. I didn’t become greedy.

Another reason I made money was because I didn’t view it as a “long-term” investment. I held the stock for less than six months. Fortunately I didn’t have to worry about the tax consequences because I used my tax-free pension funds to invest!

BEWARE OF FOREIGN OFFERINGS THROUGH THE MAIL

Let me discuss another concern. There are many fraudulent deals being promoted by unscrupulous operators outside the United States, and you ought to be concerned about them. Many of you in the audience may have one of these “secret” offshore investments, completely unaware that your money is gone forever. So sit up and take notice!

I have a sad story to relate. Several weeks ago, I was awakened at 7 a.m. by a telephone call from a subscriber who was distraught about a foreign mutual fund he had gotten into. He had tried for six months to make a withdrawal from the fund, but without success. After numerous telephone calls, letters and even one trip to Europe, he was still unable to get his money back. The mutual fund finally sent a check, but the check bounced! Desperate, he was calling me for help.

I told him that I had warned my subscribers about this firm in a recent issue of my newsletter. He was surprised and said, “I don’t remember your mentioning it in your letter.” I told him that I didn’t mention it by name because I didn’t have absolute proof that the company was a fraud. I told him that the company president is known to slap lawsuits on publications which are critical of his fund, and without proof my publisher and I were vulnerable. (You think we in the newsletter business are free to say what we want? Not when the courts are so willing to challenge the freedom of the press.)

So I did the next best thing. I didn’t mention the mutual fund by name, but I did emphasize several warning signs to avoid offshore seams, describing this company and its promotions to a “T.” Particularly, I told subscribers to be leery of mail-order solicitations of foreign-based newsletters, which offer “funds” with a spectacular past performance. Legitimate foreign funds don’t solicit business in the United States unless they are registered with the Securities & Exchange Commission. (Needless to say, the fund in question hadn’t registered, and was on the SEC’s foreign restricted list.)

The subscriber had failed to realize that this advice applied to all such promotions, even the one he was interested in. He invested his entire life savings in this fraudulent mutual fund, as well as his wife’s entire savings! It totaled $250,000. I couldn’t believe that someone who reads my newsletter could be so naive and foolish. Even if it had been a legitimate deal, how could anyone in his right mind invest all his savings in one investment? That’s financial suicide. Such a fundamental principle as diversification shouldn’t have to be emphasized constantly, but apparently it does.

I have since learned that this mutual fund is in deep trouble and may never pay anyone back. It’s a bitter pill to swallow, but my subscriber can get back on his feet if he follows some simple rules, such as diversification, staying with traditional investments and being in control of his own funds. I can’t repeat it too often: Stay away from unorthodox, nontraditional investments, particularly those that prey on your privacy. This particular off-shore fund seemed very attractive to hard-money investors. It offered secrecy, high returns in precious metals and “hard” currencies and no commissions. But I’m afraid this “no-load” fund turned out to be an “all-load” fund!

If you’re tempted to invest offshore, keep it simple. Open a Swiss bank account, invest in U.S. dollars and don’t worry about speculating from thousands of miles away. You’ll sleep better.

BE A LOW PROFILE PRIVATE INVESTOR

I have raised a great many key issues and deeply disturbing facts in this talk. I don’t want you to be unduly alarmed, however. Don’t panic, or act hastily. But you should seriously and carefully consider these things. Your personal and financial affairs are threatened, now more than ever. The best approach is to quietly arrange your affairs and protect yourself from the high-pressure salesmen, professional fraud peddlers and aggressive government agents who fill the land.

We live in an Age of Envy, as Gary North calls it. You have to fight back to keep your private wealth from being stolen, sued or taxed; but do it in a low-profile way. Your freedom depends on it. Good luck.

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